This is the continuation of my previous commentary, in which I covered the USD / gold situation in the long- and short-term. Having received many enquiries whether or not my opinion on the market changed from the moment of publishing that essay, I decided to deal with this topic once again. As most questions concern the PM stocks, this time I will focus on the short- and immediate-term with emphasis on the performance of the precious metals stocks.

First, I would like comment on the recent developments on the U.S. Dollar market. As I indicated in the previous commentary, triangle patterns are usually (60% of the time or so) a sign of the trend continuation. This rule has proven correct and we have just seen the USD testing its recent high. It was not taken out this time, but that does not mean that it will not happen in a few days or weeks. Please take a look on the chart below for details:

We may get a test of the lower border of the trend channel, but I still view the parabolic rise as the most probable outcome. This would imply not going back to this border, but breaking through the 88 level in a rapid fashion. There is a possibility that we have just witnessed a double-top, but I doubt that. I base this assumption not only on the technical picture, but also on the macroeconomic situation.

In the short and medium term it is mostly the interest rates that drive the currency exchange rates. The main indices have recently plunged all over the world, including Europe. This is an important factor as the currency exchange rate between the U.S. Dollar and the Euro is the key component of the USD Index (which is a weighted average of the U.S. Dollar exchange rates with other major currencies). The point here is that the European Central Bank has still room for further rate cuts, which would ceteris paribus cause the value of the Euro to depreciate against other currencies including U.S. Dollar. This would trigger a rally in the USD Index. The market discounts further rate cuts made by the ECB, which puts the upward pressure on the USD Index.

Moving to the gold market, several of my Readers e-mailed me asking whether the very recent bounce in the price of gold invalidates my previous comments regarding the direction in which I expect the price of gold to head in the short term. It does not, as it is in tune with what took place during the previous decline. Please take a look at the chart below:

The black ellipses mark periods where gold’s performance was similar. In the past the final bounce preceded the steep decline, which took gold to new lows. A great rally took place just after the new low was established. This is exactly what could happen right now.

The question here is – what is happening to the precious metals stocks right now, and how can they perform in the near future, especially given the abovementioned situation on the USD and gold markets.

As you may see on the chart above the recent action in the gold stocks that might be perceived as a breakout from the declining trend line, resembles the price pattern that materialized several months ago. Back then it proved to be a false alarm, and given the situation on the general stock market, we view this outcome as the most probable also this time. It is to be seen whether gold stocks will test their previous lows or break them. If SPX Index breaks down to new lows, gold stocks may follow.

The volume in gold stocks during previous fake breakout was low and this time it is considerably higher, which makes us concerned. We stick to the original interpretation, as lately very high volume is quite common, so the volume on the current breakout (?) day might be considered normal.

What is also worth mentioning, the HUI Index managed not to test new lows, as USD tested its recent highs. However, there are also additional factors that need to be taken into account here. First of all, gold did not reach previous low either – which is generally a positive thing for the sector.

The problem here is that this was also the case at the previous ‘breakout’ which preceded a decline. Therefore, what is usually a positive sign for precious metals and corresponding equities, put in recent context, is not necessarily a bullish sign in the immediate term. Please note that after this previous decline that I am referring to, a powerful rally in gold materialized. This is exactly what I expect to happen this time, but right now it seems that the decline might be more sizable.

The situation here is unclear and just a few days of very strong performance among particular gold / silver stocks on significant volume might change the situation to a great extent. What I want to achieve in this commentary is to tell my Readers the short-term outcome which is the most probable at the moment of writing it.

Of course the market might prove me wrong, as nobody can be right 100% of the time. Should my view on the market situation change substantially, I will send an update to the registered Users along with suggestions on how to take advantage of it. Register today to make sure you won’t miss this free, but valuable information. You’ll also gain access to the Tools section on my website. Registration is free and you may unregister anytime.

P. Radomski